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Small business CGT concession common errors
Small business owners may be eligible for various concessional treatments for transactions that involve capital gains tax (CGT). These concessions can reduce, defer or at times even eliminate tax payable from capital gains. Applying these concessions can often trip up small business taxpayers.
The Tax Office recently reported that its compliance work had revealed some common mistakes occurring on a regular basis from small business owners when applying the relevant tests for eligibility to these CGT concessions.
There are four concessions that may be available to eliminate or reduce capital gains made by a small business in respect of eligible assets:
The concessions are subject to a number of eligibility criteria and conditions; ask this office if you would like to know more about these concessions for small business.
In an effort to stem the tide of erroneous claims, the Tax Office issued a statement, directed to both small business entities and to their tax agents, about its areas of concern.
Maximum net asset value
The Tax Office said that one of the most common errors seems to surround the maximum net asset value test, which is one of the basic conditions that may need to be satisfied in order to gain access to the concessions in some circumstances.
Under this condition, just before the relevant CGT event happening, the total “net value” of CGT assets that the taxpayer and specified related entities own cannot be more than $6 million. (This is inclusive of the CGT asset subject to the CGT event.)
Broadly, the net value of the CGT assets of an entity is the total market value of its assets, less any
liabilities relating to those assets. The net asset value of an entity is also reduced by any provisions for annual leave, long service leave, unearned income and tax liabilities.
As noted, the maximum net asset total not only includes the value of assets that are owned by the taxpayer conducting the business, but also assets of any “connected entities” and “affiliates” of the taxpayer (contact this office for n explanation of these terms). The Tax Office said that failing to identify “connected entities” and “affiliates” is one of the common mistakes, but other errors include:
The Tax Office added that where a market value is required, accepted valuation principles should be applied.
Use contract date, not settlement date
The Tax Office had also found that business owners had incorrectly used the settlement date instead of the contract date when recording details of the CGT event. This can end up resulting in:
The Tax Office noted that a CGT event is generally deemed to occur at the time a contract is entered into, not at the settlement date.
Where contract and settlement dates cross over financial years, the capital gain or loss should be declared in the financial year in which the contract was signed.
The sale of a business often includes a clause that the seller will obtain further payments based on the business achieving certain future goals, otherwise referred to as earn-out rights. The Tax Office said that earn-out rights must be included in the capital proceeds when selling a CGT asset, and also when calculating the maximum net asset value.
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